Wednesday, October 03, 2012

The Rhubarb Patch: The Legacy of Obama's Recovery Act

With the economy the likely focus of Wednesday night’s first debate between President Barack Obama and GOP challenger Mitt Romney, I invited veteran reporter Scott Reeder (right), the journalist in residence at the Illinois Policy Institute, a free-market think tank, to debate the value of stimulus spending.

From Scott, to Eric:

It all comes down to whom you trust to spend more wisely, government or ordinary citizens.

After covering government for 25 years, I’ve reached the conclusion that folks serving at the federal, state and local levels aren’t any smarter than the rest of us. Worse, they’re saddled with inefficient bureaucracies incentivized to spend money wastefully.

President Barack Obama’s 2009 stimulus package shoveled roughly $800 billion into questionable expenditures at a time when our nation already faced a staggering debt. There are elements of the stimulus spending that I agree with. But that is hardly a surprise. After all, with a program that big there are bound to be some positive elements.

But here are my main reservations:

• It spent money that eventually we’ll have to pay back by raising taxes or printing more money.

• It put government in the position of picking winners and losers, opening the door to influence-peddling and corruption.

• It did a poor job of tracking jobs that it allegedly created and ignored jobs it destroyed by increasing the cost of government.

• It wasted resources.

A tiny but salient case in point would be the $1,109 in stimulus money paid to a suburban Batavia company to install one new picnic table at a campground.

Overall, the major shortcoming of stimulus spending is that it relies on government rather than entrepreneurs to spark the economy.

From Eric, to Scott:

OK, but what happens when entrepreneurs aren’t adding spark to the economy? When production is shrinking, consumers aren’t spending and lenders aren’t lending?

That’s when the government needs to start a few fires — sprinkle lighter fluid on the embers, so to speak — to heat things up again.

At the end of 2008 the U.S. economy was badly in need of such lighter fluid. During the transition between the George W. Bush and Obama administrations, we were losing close to 200,000 jobs a week. Our gross domestic product was shrinking at a rate of 8.9 percent.

Even most Republicans knew government shouldn’t stand back and wait for private entrepreneurs to turn things around. GOP leaders on Capitol Hill proposed two stimulus packages — one of $478 billion, the other of $715 billion,

After much haggling and deal-cutting -- mostly among Democrats, Obama needed and got a smidgen of Republican support in the Senate -- he so-called American Recovery and Reinvestment Act ended up just a little north of that higher figure.

By any measure it was the most lighter fluid ever poured over the U.S. economy, and even then, some economists warned it wasn’t enough.

Were there questionable expenditures? No doubt. Though if you check prices online you’ll see that $1,109 isn’t exorbitant for the purchase and installation of a thermoplastic-coated steel picnic table like the one in question.

And the turnaround that followed has been so slow it has given license to critics to sneer about the “failed stimulus.”

But compared to what? If you’d been in charge four years ago, what would you have done?

From Scott, to Eric:

Both political parties have disappointed me. I was similarly opposed to the Wall Street bailout orchestrated by the Bush administration.

That type of economic meddling by government is wrong, no matter which party proposes it.

Another problem with the 2009 stimulus is that nearly a quarter of it went to prop up state and local governments.

In other words, the federal government borrowed money from the public, transferred those funds to state and local governments, which then used the money to reduce the amount borrowed from the public.

That’s wasteful churn, not real economic activity.

More disturbing, the so-called Recovery Act set out to destroy some of the nation’s wealth.

Take the “Cash for Clunkers” program.

Perfectly serviceable vehicles with years of life left in them were destroyed in order to encourage consumers to buy new, more “carbon-friendly” cars. Of course, another way to help the environment would be to recycle used cars rather than junking them.

Cash for Clunkers was based on the strange idea that the nation could become richer by destroying some of its wealth.

Other interventions by the government distorted the labor and housing markets. These bailouts and subsidies destroyed the self-correcting mechanisms of the free market, and that’s why today we have the weakest recovery ever, with housing prices in the doldrums and the unemployment rate at 8.1 percent.

From Eric, to Scott:

I’m not saying you’re a partisan hypocrite regarding the value of government economic stimulus and market intervention. In fact, I salute your fidelity to principle over party.

I’m saying you’re wrong.

Wrong to imply that the Wall Street bailout and the Recovery Act weren’t necessary and that we’d have been just fine — better off, even — without them.

Wrong to say that government stimulus doesn’t generate real economic activity. And wrong to say that the reason the economy has been slow to rebound is because such spending has “destroyed the self-correcting mechanisms of the free market.”

Market economies are great, no doubt. But they’re also subject to the sort of gruesome negative feedback loops we were seeing four years ago.

Austerity, the instinctive response to financial troubles, has a paralyzing rather than rejuvenating effect on consumers and businesses. Government spending at such times restores rather than destroys the self-correcting mechanisms of the free market.

The Dow is now soaring. Corporate profits are at record levels. The estimated 3 million jobs created or saved in the public and private sector by the Obama stimulus are real jobs for real people who spend the money they earn on goods and services throughout their communities.

That’s real economic activity.

And it’s saved us from a second Depression.

Yes, the recovery has been painfully slow. But for pain and slowness, you can’t beat the idea of government contracting and stepping aside at a time of economic crisis.

From Scott, to Eric:

There’s been nothing more stomach-churning in recent years than seeing our hard-earned tax dollars used to bail out Wall Street firms that invested poorly or to corporations, like General Motors, that consistently made mind-numbingly stupid decisions.

Folks on the left call it “corporate welfare.” Folks on the right call it “crony capitalism.”

I call it wrong.

Public policy forged in the middle of a panic rarely reaps beneficial results.

If you combine the money Bush and Obama poured into bailouts and attempts at stimulus you come to more than $2 trillion.

Those dollars didn’t just come out of the ether.

They came from hard-working men and women who pay their taxes, educate their children, meet their mortgage payments and save for their retirements.

When government takes their money, they take it away from those who will create a real economic recovery.

Remember, all wealth ultimately comes from the private sector.

When the government sucks money from the private economy and churns it through inefficient bureaucracies before handing some of it back, that’s not economic activity.

Why take money from individuals and employers who have made wise economic decisions and give it to those who made poor ones?

These misguided interventions put more faith in the “wisdom” of government than that of the individual.

From Eric, to Scott:

Why should government deliberately have gone deeper in debt when the economy was on the verge of shutting down? It’s a common-sense question.

The answer: Because the alternative — letting banks and major industries go bust, slashing spending and letting the market mete out its harsh discipline on the hapless and often blameless victims of a downturn — would have been catastrophic.

Because many people and businesses devastated by the Great Recession were not guilty of having made poor decisions. They deserved a helping hand, not a wagging finger.

And because, in retrospect, it worked.

To argue otherwise, Republicans have repeatedly cited Obama’s “promise,” actually a pre-inauguration projection by two of his economic advisers, that the Recovery Act would keep unemployment below 8 percent and bring it down to 7 percent by 2010.

Yes, that forecast was overly optimistic. Unemployment has been over 8 percent ever since. It was based on premature data and too much wishful thinking. But the vast majority of recent, independent studies have concluded that Recovery Act spending significantly boosted the GDP and employment.

It paid for needed infrastructure improvements, invested necessarily (though not always successfully) in clean energy, strengthened the social safety net and otherwise spent in ways that individuals do not.

“The New New Deal,” a recent book about the 2009 stimulus by Time magazine’s Michael Grunwald quotes Mark Zandi, chief economist for Moody’s Analytics and a Democrat who advised Republican John McCain’s 2008 GOP presidential campaign:

“If you study the data and look at the timeline,” Zandi said, “there’s no question the Recovery Act saved us from something much, much worse.”

Obama may not say it tonight but I will: The “failed stimulus” was a success.

Comments

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"That’s when the government needs to start a few fires — sprinkle lighter fluid on the embers, so to speak — to heat things up again."

Eric is right about this but it's how government does it that's important. The way NOT to do it is through bailouts, corporate welfare, and spending on items that the government may think is a priority but markets do not value. The way to stimulate and start the fires is to make it worthwhile for entrepreneurs and businesses to take risks and invest. Specifically, the government should have lowered the corporate tax rate, made the repatriation of overseas cash easier, cut back on regulatory burdens, cut back on tariffs and other trade "protections," pursue a predictable and sane monetary policy with a nominal growth target, and stop the type of meddling (e.g., picking winners and losers through legislation) to which Scott referred. None of this was tried and that's why we have a lousy recovery to go with our lousy recession.

Notice that conservative "solutions" always involve giving more money to rich people. This is somehow not "picking winners and losers." Maybe God (or the market - same thing, isn't it?) has chosen the winners already, so the government should heap additional wealth on them.

Let's look at Greg's proposed solutions, one by one:

- Lower the corporate tax rate - apparently it's not "corporate welfare" if all profitable corporations get the bennies.

- Make the repatriation of overseas cash easier - this is rewarding people and companies who hired tax lawyers to help them stash their cash abroad to avoid paying the taxes they should have paid.

- Cut back on regulatory burdens - making it easier for industries to line your lungs with their chemicals, etc.

- Cut back on tariffs and other trade "protections" - this makes it easier to close up a factory here and ship it to some other country where people will make pennies on the dollar.

- pursue a predictable and sane monetary policy with a nominal growth target - this is vague, but normal monetary policy does you exactly no good in a liquidity trap, which we were (and are) in. It amounts to a tight money policy, which favors those who own over those who work.

Basically, it's all the same old voodoo econ. Good times or bad, what this country needs to do is to shovel more cash into the pockets of the fatcats. One of these days, it'll make us all better off. One of these days.

“The New New Deal,” a recent book about the 2009 stimulus by Time magazine’s Michael Grunwald quotes Mark Zandi, chief economist for Moody’s Analytics and a Democrat who advised Republican John McCain’s 2008 GOP presidential campaign:
“If you study the data and look at the timeline,” Zandi said, “there’s no question the Recovery Act saved us from something much, much worse.”

I keep reading that based on the word of one economist, who must have ultimate credibility because he advised McCain, we are just supposed to believe that "the stimulus worked." Zandi's entire contention depends on what you believe about the "multiplier." The fact remains that the solemn promise Obama's people about the unemployment rate was not fulfilled. At one point should we take their word in advance, especially as his latest plan was to ask for another giant stimulus?

Good to see Cash for Clunkers brought up. It reveals Obama's sixth-grade science fair mentality about energy and his idea that huge subsidies of windmills and solar panels would solve our economy. With cash for clunkers, he repeatedly stated a quite outdated conception that everyone was driving around in 1974 Oldsmobiles that got 12 miles a gallon and that his misguided program would rescue us all from that.. Go back and listen to his statements; I wondered when the last time he had actually driven was. He completely distorted the automobile market and didn't do much for energy efficiency.

Way too much of the stimulus was spent to slosh money into state and local governments to sustain public union workforces. A year or two later, the day of reckoning came; look up the Camden, NJ police force if you want an example of how local governments eventually had to wake up.

Speaking of promises, he promised that Obamacare, upon adoption, would lower health insurance premiums. That has become a laughable idea; they have gone way up. Is he accountable for anything?

The fact remains that Obama kept the economy from sliding into the abyss at which it was poised when he took office. I'll never understand the blind faith so many people have that lowering taxes and otherwise making it easier for the 1% would in any way improve conditions for anyone else.

Completely OT, but I keep getting "Script error" messages when clicking on things in this blog today. It's happened on two different computers, fifteen miles apart, so it's not likely a problem on my end. Anybody else having the same problem?

But the biggest mistake was bailing out the banks in the way it was done.
What should have been done was to bail out the people who had underwater mortgages, by paying down their loans until their homes weren't underwater any more.
I know people will say that it's just bailing out irresponsible people who took out mortgages they couldn't pay, but it wasn't their fault as they had no control over the price bubble, which crashed or the corrupt banks that gave them the loans.
The real problem was packaging mortgages as securities, which the homeowners never knew about or for that matter even understand.
Even a very conservative friend of mine thinks that would have been the way to go.

So instead, the banks keep doing what they did before, have hobbled or totally stopped reregulation [Volcker Rule] & are once again speculating in energy futures, thus driving up oil & electricity prices.

So the banks gave out huge bonuses & perks & the country got screwed!
Just what Romney plans to do if elected!

I do appreciate your addressing my proposed solutions but your analysis creates more questions than answers. It's possible that I misunderstood some of your criticisms or you misunderstood some of my points. Either way, my initial reaction is that your policy preferences are in direct contradiction to one another and I can't make sense of how they fit together.

In response to my idea to lower the corporate tax rate, you wrote "apparently it's not "corporate welfare" if all profitable corporations get the bennies."

I don't understand your response. The U.S. has the highest corporate tax rate in the world. How is it "corporate welfare" to lower the rate and make doing business in the U.S. more attractive? Again, corporate welfare or corporate cronyism is premised on the idea that there are handouts or special favors given to corporations. Letting all corporations keep more of their money is hardly a handout or a favor, especially when the rest of the world has lower rates. But if your point is that U.S. corporations should be able to thrive in a high tax environment (because of American exceptionalism or some such), I accept that but have a hard time squaring it with what you write below.

You wrote that allowing easier cash repatriation "is rewarding people and companies who hired tax lawyers to help them stash their cash abroad to avoid paying the taxes they should have paid."

I'm very puzzled by this comment particularly in light of what you wrote about lowering the rate. First, do you prefer that companies continue to "stash their cash" abroad rather than keep it here? If not, then why not give them incentive to bring it back? If so, then please explain why you think that foreign investment is preferable to investment in the U.S. By not wanting to lower the corporate rate and not wanting to make it easier to repatriate cash, you seem to be encouraging foreign investment and the movement of business overseas. What is your rationale behind that preference? I'm not saying it's necessarily a bad idea but I'd like to understand it.

I suggested that we cut tariffs and reduce trade barriers and you responded that "this makes it easier to close up a factory here and ship it to some other country where people will make pennies on the dollar."

If you believe that then it's directly contradictory to your idea of keeping the corporate tax rate high and keeping corporate investment overseas. The high rate and the inability to repatriate contribute far more to decisions to close factories here and move operations overseas than anything involving trade restrictions. My bottom line question is do you want businesses to stay in the U.S. or do you want them to go? Your answers to my policy suggestions are a mess of contradictions.

I wrote that we could pursue a predictable and sane monetary policy with a nominal growth target and you responded that "this is vague, but normal monetary policy does you exactly no good in a liquidity trap, which we were (and are) in. It amounts to a tight money policy, which favors those who own over those who work."

Actually, the criticism of pursuing a nominal GDP growth target is very specific. If you want to understand how that works, I'll be happy to explain. The key is that we're talking about only a nominal rate of growth, which should be fairly simple to attain. What I don't understand about your response is how that could amount to a tight monetary policy when one valid criticism of targeting nominal GDP is that it is potentially inflationary. I'm not sure what you mean by "those who own" and "those who work" because they are often the same people. Maybe you mean debtors and creditors?

Does a stimulus result in economic activity? Sure. But does that activity raise the standard of living? After all, paying people to move boulders from one end of the field and back is economic activity of sorts. And it does benefit the ones who move the boulders. But the country as a whole is left worse off financially. But maybe still better off because we avoided riots by the unemployed? Maybe.

It would be more accurate and honest to talk about the stimulus as a mechanism for reducing unemployment more or less on par with welfare in goals and nature. So the question is, was $267,000 per created/saved job a good welfare program? (That's using Obama's 800 billion stimulus cost, ignoring the preceding one from GWB.)

As an aside, since the money went to companies who I dare guess on average are not paying anything close to $267K to their employees even over several years, how is that not a trickle down theory?

ZORN REPLY -- The "cost per job" figure is ignoromics in action. Much of this money went to long-term improvements such as roads, bridges, technological investment and so on. But even if the person hired did nothing useful -- dug holes and filled them in, say -- injecting his wages into the economy has a further stimulating effect on the businesses boosted by his spending. In fact and apropos of doing nothing for money, the bang for the buck on food stamps and unemployment insurance payments is widely thought to be far greater than the bang for the buck on tax cuts.

Debt and leverage CAUSED the meltdown...the solution was more of the same?

"I know people will say that it's just bailing out irresponsible people who took out mortgages they couldn't pay, but it wasn't their fault as they had no control over the price bubble"

If they bought a house at an inflated price, it WAS their fault. If they refinanced and pulled out equity, it WAS their fault.

"the banks keep doing what they did before... are once again speculating in energy futures"

Please. Oil (and commodities in general) are higher for ONE reason: the zero interest-rate policy created by the Fed. Speculators have nothing to do with it. Some people seem to not understand that there needs to be a buyer for every seller. If evil speculators are driving up the price (by buying), who are the suckers who are selling? I'll tell you...other speculators.

@ Pan,
"I'll never understand the blind faith so many people have that lowering taxes and otherwise making it easier for the 1% would in any way improve conditions for anyone else."

Do you understand that a business owner or investor is taking a RISK when they put their capital to work?

Abd this whole "lowering taxes" statement is loaded to begin with -- to have your taxes lowered, you must be paying taxes in the first place. Let's see how much money flies out of France in coming months as they raise their taxes to absolutely confiscatory levels.

If we are truly interested in improving conditions for "everyone else," we should start with trying to reduce the number of illegitimate children and single-parent households.

"The government needs to spend money, otherwise the economy will grind to a halt" is a VERY, VERY dangerous argument.

I hope everyone understands that.

(Just for the record, I have no problem spending money now, and sticking the bill with Eric's childrens' generation under the guise of heading off doomsday. To argue anything else these days is foolhardy)

--Eric dismisses Obama's advisors' projections in calling for massive stimulus as "too optimistic," (how innocent) but it is worth noting how far off they really were:

"With the stimulus, Romer and Bernstein predicted that unemployment would never rise past 8 percent, and would peak just under that in the third quarter of 2009 before steadily declining to around 5.6 percent by today. WITHOUT the stimulus, they predicted that unemployment would peak around 9 percent in the third quarter of 2010 before declining to around 6 percent today."

In other words, according to his crack staff, IF WE HAD DONE NOTHING, we'd be better off today.

No one really knows if things would have been "catastrophic."

ZORN REPLY -- The numbers they were working with at the time were later revised downward, meaning the hole was quite a bit deeper than they thought. And it was, as you seem to acknowledge, JUST TWO of his economic advisers writing in a report that Obama never signed off on or endorsed. So those who simper that "Obama promised that the stimulus would keep employment under 8 percent" are either ignorant or mendacious....I'm glad we can agree on that.

"So those who simper that "Obama promised that the stimulus would keep employment under 8 percent" are either ignorant or mendacious....I'm glad we can agree on that."

Oh, please, Romer wasn't just one of a gaggle of economic advisers; she was the chair of the council. The power of the group depends on how much the president gives to it, but clearly she had sway. I don't recall Obama retracting any of her projections. She regularly spoke for Obama on the talk shows. The idea that she was just speaking for herself is laughable.

ZORN REPLY -- As is the idea that this projection has anything to do with the politics or negotiations or shape of the stimulus package several months later. There was, recall, basically NO disagreement that the economy needed a stimulus push. The only questions was how much and where it would go, and Romer's projection had zero to do with that.

Eric, so Bush was an idiot because he believed the bad intelligence on WMD's in Iraq, but Obama isn't for listening to advice based on bad economic data?

ZORN REPLY -- He didn't "listen" or not listen to this projection, which was independent of the very sound advice that the economy needed stimulus and bad. Romer, one of the advisors, wanted the stimulus to be muchbigger, $1.2 trillion as I recall, and the amount and structure of the final package was very much based on politics and haggling, not on this one premature and ill-advised prediction.
So, in short, no, the comparison is not valid in the least. But I'm sure it won't be hard for you to come up with other reasons to despise Obama.

Never ever, ever promise/insinuate/mention something that you can't deliver and have very little control over the delivery or outcome. Probably rule number 2 in business, I think. Learning, on-the-job, is especially painful when you're President, isn't it?

" ZORN REPLY -- The "cost per job" figure is ignoromics in action. Even if the person hired did nothing useful -- dug holes and filled them in, say -- injecting his wages into the economy has a further stimulating effect on the businesses boosted by his spending. In fact and apropos of doing nothing for money, the bang for the buck on food stamps and unemployment insurance payments is widely thought to be far greater than the bang for the buck on tax cuts."

By this magical money theory, all you have to do is print dollars and distribute them to people. Instant prosperity. Think it through. Don't get confused by paper money. Its a medium of exchange. Each person is still exchanging something he or she produced for something another person produced. If a person is given a check for not producing anything (or not producing anything worth that money to someone else), he or she is simply given someone else's resources. Resources being moved around is not economic growth. There are many ways you can think through this. Here is one way: you have a money press at home and can print any amount of dollars you want; when you start printing, you are clearly better off, but is the whole economy better off?

Just trace the whole chain of production and consumption and you will see the ridiculousness of the magical money idea. What printing of fiat money (that's how the government finances stimuli nowadays) does create is a temporary illusion of more resources than there are really are around. It's financial misinformation, and it does spurs people to spend resources (on both consumption and investment, depending on various factors), but ultimately not in a way that increases the standard of living. Basically, it's a way to move from one bubble economy to another, losing more and more ground with every bubble burst.

Doing nothing for money and being paid to do useless work (nothing that anyone would have otherwise paid for, therefore not adding value, not producing utility, not raising the standard of living) are both income redistribution schemes, to be evaluated as such. The latter however consumes additional resources and therefore is a worse way to do income redistribution.

Income redistribution may have legitimate social goals, such as social cohesion, political stability, crime reduction, etc., all of which would ultimately have some positive economic impact, but it also has a big economic negative (on top of social negatives as well, but that's not the topic of this thread). The negative is direct reduction of economic efficiency because on average it moves resources from more productive uses to less productive. It has to be understood in terms of these trade offs.

" ZORN REPLY -- The "cost per job" figure is ignoromics in action. Even if the person hired did nothing useful -- dug holes and filled them in, say -- injecting his wages into the economy has a further stimulating effect on the businesses boosted by his spending. In fact and apropos of doing nothing for money, the bang for the buck on food stamps and unemployment insurance payments is widely thought to be far greater than the bang for the buck on tax cuts."

Really? You are essentially saying it doesn't matter what it cost the government to create a job. Your description of the stimulating effect does not take into account where the money comes from. The math only works when you use the multiplier but ignore the subtractor. This would mean a 95 percent tax rate really would work.

One can debate tax cuts vs spending but saying that a tax cut is spending is ignoromics. When Preckwinckle rolled back the Cook sales tax, was that spending?

P.S.
Eric's "injecting his wages into the economy has a further stimulating effect on the businesses boosted by his spending." also contains a basic logical error:

The claimed jobs added/saved total of 3 million already reflects ALL the effects of the stimuli, direct and indirect, primary, secondary, etc.. Therefore the stimuli cost / 3 million jobs is the correct way of measuring the cost benefit (actually, benefit / cost) ratio.

One way or another, out of everyone's pockets (not equally of course), we paid businesses 800 billion dollars to hire (or retain) 3 million people, paid wages that would take many years to add up to 800 billion dollars and engaged in production of goods and services that are worth to others less than what these people are paid (otherwise they would have been hired to produce it anyway.)

1. ARRA, and with today's other proposals by the OA, used (uses) federal money to pay for state specific issues. "Shovel ready" jobs are supported by a tax base that funnel revenue for improvements. The same is true for public officials. Using federal money to hire local state and city public workers only places local entities on the hook for said individuals. Think pensions and HC insurance costs. It becomes even more problematic when federal funds dry up.

2. Today's government lacks adequate vision. One of the government's jobs is to provide demand, which in turn inspires innovation by the private sector as the private sector rises up to meet the challenge. Example: The federal government could easily create a mandate that requires the states to generate a % of energy using "green" technologies. The federal government gives seed money to the states for start up and implementation, but it becomes the responsibility of the state thereafter. The federal government DOES NOT get involved with the business that is trying to meet the demand. The state IS the firewall (against collusion) as each state has to compete with its respective neighbors to run fiscally sound operations.

3. Today's federal government is dysfunctional BECAUSE they are trying to solve all of our problems at the federal level. It was never designed to do that, nor should it even try. "Race to the Top" is a perfect example of how the federal government is trying to solve the problem of education in America, and it's using ARRA funds as the catalyst. It's a mistake top to bottom.

In all of the reporting that I have read from the Obama administration, they claim to have created or saved, 2,3,4 million jobs. As with anything the politicians say, it seems to be a moving target that no one can verify.
If I am middle of the road and use 3 million jobs, with a stimulus spend of over $800 BILLION , each job saved cost $266,000.
If you wrote a check for $50,000 to people who wanted to work, it would have gone to 16 million people. That would most assuredly have stimulated the economy because all the money would be spent by them not lost in the bureaucracy of the government.
If I was a CEO of a company that paid $266,000 for jobs that really should pay less, I wouldn't be in that position long.
I realize that the country was in a bad place but throwing money at poorly designed and implemented programs may have SLOWED the race to the bottom, but now is restricting the climb to the top.

ZORN REPLY -- Those estimates come from the CBO and independent economists... it's not a "claim" by the Obama administration.

When you say "One of the government's jobs is to provide demand..", I am guessing you mean narrowly for what be considered either purely a public good (in a proper economic sense; clean air, defense, world stability (clean energy might go under that) would be some prime examples) or for a public good add-on to a private good (education is an example of that), right?

Stimulus does not work well when there is a structural problem like private job killing policies (over regulation, High Obamacare costs, uncertain/concern about additional taxes, socialistic attacks on business, inappropriate trade arrangements, liberal labor board). Stimulus aggravate the problem when there is already way too much debt. Stimulus assumes people/companies will spend more than the stimulus, but that may not be true. This last time they did the responsible thing and paid down debt instead. The government bailed out the big bad guys and left the tax payers with the bill. The politicians choose winners and losers when the consumer should have. Bankruptcy courts do a better and fairer job than Obama. Did you know that the Federal Reserve lent 16 trillion dollars (equivalent to the national debt) to the big banks at zero interest with out knowledge or consent of Congress? The banks lent it back to the government at 2.8% interest by buying treasury bills. The structural problems and getting burnt in in irresponsible home loans they no were else to lend the money.

The net of this is that, after three and a half years of an Obama economy and the vaunted recovey spending, U-3 unemployment is over 8%, U-6 unemployment nearly 15%, and the figures look better than they because labor participation continues to fall.

You voted the last Republican president out because of his perceived mishandling out of the economy. If this performance had been under a Republican president, you'd vote him out, too.

ZORN REPLY -- The "cost per job" figure is ignoromics in action. Much of this money went to long-term improvements such as roads, bridges, technological investment and so on. But even if the person hired did nothing useful -- dug holes and filled them in, say -- injecting his wages into the economy has a further stimulating effect on the businesses boosted by his spending.

GREG J REPLY -- Oh dear. One sentence after you cite something as "ignoromics in action," you come up with the idea that paying someone for something of no value is stimulative? Eric, I have a lot of respect for your knowledge of a lot of different topics but this particular idea of yours is flat out illogical, nonsensical, and otherwise wrong. I have nothing significant to add to what Boris and quotidian already wrote but I urge you to consider their comments and other sources available on the topic.

ZORN REPLY -- Take it up with Keynes. Or any of the multitude of economists who'll tell you that unemployment, food stamps etc. get more stimulative bang for the buck than tax cuts.
With luck we won't see the grim results of the Hooverian experiment Romney wants to run on America. Though, as ever, I find your faith in the magic of the unfettered markets touching.

Not quite. From my POV, "demand" is a goal oriented defined action. And it is strictly confined to action(s) that affect the USA. Items related to defense of our nation are something entirely different.

Mssrs. Kennedy and Eisenhower are accreditted with NASA and our Interstate Hwy system, respectively. The challenge of each of these "demands" was met by private enterprise, and each demand provided a plethora of jobs and revenue, while providing a benefit to our national interests. Each of these men were thus enshrined as "visionaries" because they were able to look beyond their present circumstances and project the nation forward for the benefit of all. What will we be working on 25 years from now? What about 5 years from now?

Everyone agrees that a strong economy will go a long way to solving a lot of our national fiscal problems, but what's the (proposed) catalyst for generating a strong economy? Clinton and Bush relied on the tech and housing sectors. What do Obama and Romney (potentially) have? What is either proposing? Taxation tinkering? What good is taxation without the flow of capital? In short, where's the demand to start the flow of capital again?

Gang, the IE script error appears to me to be from You Tube videos posted on the blog. If you're using a computer - say, at work, which tend to rely on IE - where such videos are prohibited, I suspect you'll get the script error.

In my case, it takes 14 clicks on "OK" to get past the error.

I suspect that this will all end once the You Tube links roll off the front page of the blog. We'll see if that happens.

None of the conservative filibusterers here have addressed this debate's central point, which is that conservatives are proposing basically nothing. All they have to suggest is cutting, rescinding, rolling back, canceling, defunding, etc. etc., and prosperity supposedly will magically return. Nonsense.

As a conservative commenter, you're full of it. The lack of accountability from the word go doomed ARRA before it even got off the floor. And since government agencies won't be accountable to themselves, one option is to restrict cash flow to force accountability upon them, thus the call for reductions in budgetary allocation.

ZORN REPLY -- Grunwald's book notes that there were no earmarks, remarkably little fraud and, with recovery.org, unprecedented transparency (how do you think my opponent learned about the picnic table?). Do you have sources to gainsay that?

There are certainly circumstances when doing nothing is the right thing to do. For example, when you have a cold. However, in this case, there is something to do:
1. Clean up the financial system. That starts with the Fed:
a) remove the unemployment management goal
b) make the money supply management formulaic rather than human decision based
Sound money / predictable monetary policy is the biggest economic stabilizer / confidence builder the government can create.
2. Deal with the unemployment as a social welfare problem, with the emphasis on employer-centric training.

But what is your suggestion, Pan and behind that, what is your understanding of how the economy works, what happens doing bubbles and burst, what makes it recover and grow?

Ethan,

The Interstate Hwy system fits under the “public good” concept. NASA is probably a stretch, but at least sold as a public good.

Re.“Clinton and Bush relied on the tech and housing sectors”. Wouldn’t be more precise to say is that they helped inflate those sectors, creating bubbles, both of which burst? Surely you wouldn’t more bubbles? We are starting to re-inflate the housing market, inflating the green-energy market and are tittering on the brink of bursting the educational bubble (student loans). All those these are binges with painful outcomes.

I was having the same problem with an IE script error message. It seemed to me that it had to do with the ABC video on the "I have no words for this right now" post. EZ just took the video off the main page, and that seems to have solved the problem, no?

@Ethan: The reason the federal gummint is doing so many things is due to the refusal of many states, mostly Southern, to do anything!
That's why the feds created Medicaid, because states did nothing & their poor citizens croaked from the lack of medical care or moved to states that did have medical care for the poor & overloaded them!
In many cases, the individual states were happy to unload that bill onto Washington.

Just remember one important fact:
The Red states that currently oppose federal help, get back more in taxes than they pay in, while the blue states that support federal involvement get back less than they pay in taxes!
It was the feds that built the useful TVA, but also the totally useless Tennessee-Tombigbee Waterway that sucked up billions back in the 1970s-80s & continues to lose money! The Southerners wanted it & the North & West paid for the damn thing!

Are you trying to say in your last paragraph that one wasteful spending justifies another?

Are we talking about the same Krugman who advocated inflating the housing bubble as a way out of the previous recession? Giving a drug addict to a narcotic during a withdrawal does lift up the mood, but the next crash is just harder.

ZORN REPLY -- Take it up with Keynes. Or any of the multitude of economists who'll tell you that unemployment, food stamps etc. get more stimulative bang for the buck than tax cuts.
With luck we won't see the grim results of the Hooverian experiment Romney wants to run on America. Though, as ever, I find your faith in the magic of the unfettered markets touching.

GREG J REPLY -- That's not the point I was debating (although we can debate that too). My problem is with your idea that paying somebody to do nothing (or something unproductive) is preferable to leaving them unemployed. At best, the overall balance sheet stays the same; at worst, you've done harm by occupying a resource who could be looking for gainful employment elsewhere.

ZORN REPLY -- We do, however, find it makes economic sense to supplement those who have for one reason or another fallen on hard times and at least temporarily can't support themselves. You always have to look at the alternative, and here, with the Recovery Act, the alternative was going to be much worse. I have linked above to an omnibus of academic studies in which people who probably know even more than Boris Gendelev about economics take a very close look at the Recovery Act. Most of them deem it a success. This isn't arguing from authority, it's pointing to sources.

Eric, "unfettered markets" is a stawman. Markets can operate normally within a rule of law, a stable monetary system, a stable political system, no constant natural or war emergencies, etc., so very much fettered. But there are also bad ways to fetter the markets.

I don't think posting on economic topics with self-assurance of someone who knows what he is talking about, but then, when push comes to shove, simply arguing from someone else's dubious authority (some number of economists, with probably as many thinking the opposite and none able to predict anything) is very productive. Imagine if MCN said "This is so because Milton Friedman said so", or if I said "This is so because Hayak said so" and failed to explain anything. If you are going claim to be Keynesian, then please be able to actually fully explain the theory, the context for which it was created and answer the criticism.

Saying that someone has faith in [well fettered, per above] markets, is nothing more than saying one has faith in the multitude of self-interested interactions between good-faith individuals to work out to an aggregate net positive. There is no magic required. To make things better by just printing and giving away money some magic does seem to be required. But the faith in politician-bureaucratic-technocrat's ability to know where to shift resources to make it better in aggregate is naively touching.

I'd jump in here, but people already know what I have to say so I'm not going to bother. The fact is, U-6 unemployment is nearly at 15% regardless of what Obama tried to do.

In other words, he failed. When CEO's in the private sector fail, they get fired. So what's the delay with this guy?

I must say, though, that this cliched, knee-jerk raising the "evils" of "unfettered" private markets is hilarious and ironic given that the complicity of government in the Great Recession is a fact both indubitable and entirely untreated by the leftists on this board as it puts them in an unescapable trick bag.

ZORN REPLY -- We do, however, find it makes economic sense to supplement those who have for one reason or another fallen on hard times and at least temporarily can't support themselves.

GREG J REPLY -- Yes, and I agree with that (always good to find at least a narrow point of agreement). That does not extend to paying people for unproductive work, however. Unproductive work is not stimulative and could be counter-stimulative. There is a legitimate debate to be had over the Obama stimulus but the make-work idea is no good because at least the unemployed person is free to look for productive work.

ZORN REPLY -- You can hardly get less "productive" than shipping men overseas to kill people and break things, yet those who don't want to credit FDR's New Deal for yanking us out of the Depression nearly always point to WWII as the massive public works project that turned us around economically. Yeah, we built a lot of military hardware (still do) but the loop is fairly closed, is it not?
But the money's moving around and without that...

MCN,
"So what's the delay with this guy?" I'm not conceding that he failed, of course, given the starting point that he was saddled with. But, a big part of the reason that many aren't too interested in firing him is that the CEO we'd get in his place promises to be no better than the failed CEO who preceded Obama.

I assume that many will vote for Obama based on the same type of rationale (from the opposite perspective) that you must have followed in voting for Bush in 2004. Though that won't be the case for me. All things considered, I think he's done fairly well.

" the multitude of self-interested interactions between good-faith individuals [**where some actors have vastly more power to achieve their interests at the expense of others' and the collective good**] to work out to an aggregate net positive."

You left something out there - the part that the free-market devout always conveniently omit.

"ZORN REPLY -- We do, however, find it makes economic sense to supplement"

It is easier, albeit with many caveats, to put forth a case that it makes social sense and therefore some economic sense. It does not make economic sense in a way you appear to think, because it is resource reshuffling from [on average] more to less productive uses (because a distributed market is a much better processor of information). If that made economic sense, then perhaps we ought to pay economic supports (just print some dollars and send them there) to the poor all over the world and see the economies of the 3rd world countries bloom. You have to take your ideas to their logical conclusions or fully understand and specify their context and limitations. Why would resource redistribution (which any stimuli is) be economically boosting in one context, but not another? What are the principles involved?

“Look, I’m at the start of my administration. One nice thing about the situation I find myself in is that I will be held accountable. You know, I’ve got four years. And, you know, a year from now I think people are going to see that we’re starting to make some progress,” Obama said. “But there’s still going to be some pain out there. If I don’t have this done in three years, then there’s going to be a one-term proposition.”

It isn't done. Look at the unemployment statistics--ALL of the unemployment statistics.

"the make-work idea is no good because at least the unemployed person is free to look for productive work. "

This argument just doesn't stand up to scrutiny. So you're saying it's impossible to work at one job and search for another at the same time? That would come as a surprise to a great many people, I would imagine.

Plus, a make-work job would at least give the worker something to put on his/her resume instead of the fatal "gap." Now, it's debatable how much credit future employers would give to such jobs on the resume, but given how ridiculous they've become about any sort of gap, a government job couldn't be any worse for the worker's chances, unless they have the misfortune to be interviewed by someone with your, shall we say, grotesque view of all government workers as slothful idiots.

The degree(s) of "help" provided by Clinton and Bush are questionable, but from a larger context I'll concede the point. Neither really had any vision for the country per se, but chose instead to tinker with the mechanisms that were moving the economy along. Today's crop of candidates is no different as they spar over levels of taxation but fail to provide any quantitative direction(s).

Garry,

I think you're missing my point. IMO, the federal government can mandate that states provide XYZ (in terms of a % to their respective population), thus we'd still get the same level of service, but it would not be provided by the feds. Medicare is a fair example of this because Medicare (I believe) is managed by the state, but dues are held by the feds (IRS). As the state supplies its citizens with the benefit, the states are reimbursed accordingly. In this example, the system is working as designed. But when the feds take over the programs, we have problems. Education is a prime example.

As far as your red/blue state stuff, the amount of federal funding states receive is not based on party but on size and population density. Census data tells policy wonks how many firemen, police, teachers, et al, there should be and those numbers are translated into dollars, which is then translated into levels of taxation. Dollars allocated to the states (from the federal level) use the same data and the "color" of the state means nothing. At least that's the way I believe it's supposed ot work. How the state actually determines the number of said individuals is anyone's guess, but they do receive funding from the feds for said services.

EZ,

I'm still looking for an article I read a while ago that defined layers of accountability in relation to government spending. Accordingly, spending which met the intent of the definition was enough to satisfy the regulators who could then go home and claim that dollars spent were accounted for. The article was written in response to Congress' questioning of the ARRA funded "construction" signs that self-promoted the legislation, installed at "shovel ready" construction sites around the nation. While the sign work met the definition of the intent, the work itself was deemed unneccessary and therefore questionably accountable. There are a myriad of ways to waste taxpayer money, while under the umbrella of accountability. It's simply a matter of definition.

How are some of these actors more powerful? You must be talking crony capitalism, not a free market capitalism. In that scenario, those with access to government power (on any level) are indeed more powerful. If it is something else, please explain how anyone acquires power (a way to legally compel someone to do something against their will) that is not government power?

And what do you contrast that too anyway? Those in government - definitely people with power over others - making decisions for others. But of course people who end up in government are a special altruistic breed, with everyone else's needs and desires foremost on their minds. Right?

Eric

The issue with how the success is measured. If it is measured in the number of jobs, it's a success (I am stipulating the measurement of 3 million, because you don't have the background to understand how iffy such estimates and attributions are, how we are at best talking correlation, not causality and because as I said, stimuli in principle would tend to create more activity, via its misinformation effects.). If you measure it in terms of cost per job, and realizing that these are essentially jobs for which there was no real demand - make work, it was a monumental waste. There were a lot cheaper ways to provide temporary supports for the unemployed.

When you refer to sources who claim that it would have been worse otherwise, you have to consider that it is the same sources who had and still have no ability to predict the economy better than you or I. Yet it is only the ability to measure economic indicators at one point of time and predict beyond that point that can give someone a way of telling what would have been. How did they suddenly acquire this magic abilities?

ZORN REPLY -- You can hardly get less "productive" than shipping men overseas to kill people and break things, yet those who don't want to credit FDR's New Deal for yanking us out of the Depression nearly always point to WWII as the massive public works project that turned us around economically. Yeah, we built a lot of military hardware (still do) but the loop is fairly closed, is it not?
But the money's moving around and without that...

GREG J REPLY -- I wouldn't call WWII productive from an economic point of view unless you take the Axis' actions as a given and find that a free Europe was worth the cost. Also, don't you think that one of the huge benefits to the American economy was that the war wasn't fought on our soil (except Hawaii) and Europe had to buy from us to rebuild? That created a competitive advantage for us that lasted decades. Again, I'm refuting the narrow point that you made earlier (i.e., the ditch-digging example) but I'm agreeing with your follow-ups.

@AReader,

It's not impossible to work and look for a job. I've done that. However, it's better, from a macroeconomic perspective, for people to spend more time looking for a job than wasting some of their time doing an unproductive activity. To clarify, I'm not talking about public works projects that add at least a little benefit; I'm talking about truly unnecessary uses of labor.

Oh, and there you go insulting slothful idiots again by comparing them to government workers! Will your insensitivity never cease?

ZORN REPLY -- You can hardly get less "productive" than shipping men overseas to kill people and break things, yet those who don't want to credit FDR's New Deal for yanking us out of the Depression nearly always point to WWII as the massive public works project that turned us around economically. Yeah, we built a lot of military hardware (still do) but the loop is fairly closed, is it not?

MCN Response: Spoken by like a liberal who, true to his cloth, knows next to nothing of national security.

On the other hand, maybe we'd all be better off if we'd kept our guys home and let the Germans and Japanese win WWII, or the Soviets the Cold War. Of course, in the latter case, you'd be working for TASS and writing what they tell you to write.

But at least you'd have a job.

ZORN REPLY -- You're evading the central point, which is that war is extremely stimulative to an economy. Don't get all wild-eyed patriotic military dad on me, there. No one is debating the value of World War II. I'm saying it's a huge public works project that leaves us with nothing except the tools of war unless you count the value of national security/freedom, etc.

MCN,
"then there’s going to be a one-term proposition". And there IS such a proposition, as he said. I don't agree with the proposition; you do. GWB in 2000 said he was going to be a uniter-not-a-divider and that he didn't believe in nation-building, but I don't suppose that you voted against him because he hadn't delivered on those things when he came up for rehire in 2004.

True, if you measure the economic growth not in terms of the living standard but in terms of the amount of labor effort and the weight of things produced. Very stimulative, even more so if you include military activity as part of the economy, for sometimes soldiers are laboring 24/7. But who would seriously think that a war moving the standard of living forward?

Anyway, I am glad that you Eric are not advocating wars as a path to prosperity (sustained improvement in the standard of living). But it is for essentially the same reasons that make-work is not such a path either.

EZ Reply: "You're evading the central point, which is that war is extremely stimulative to an economy."

MCN Response: You haven't got a clue, have you? We alone lost 400,000 men plus mained and wounded and uncounted materiel in WWII. 50,000,000 plus dead and a continent or two wrecked? Stimulative to an economy? You are really, really short-sighted.

Under your logic, we're better off blowing up half the East Coast because rebuilding it would stimulate the economy. Or maybe we should take twelve million unemployed and pay them to put one thing on top of another thing for a few years. That would be useful.

You really need to read Hazlitt and understand the broken window parable. A couple of books on military history would be useful, too.

"ZORN REPLY -- All these years folks on the right have been telling us no, no it wasn't the New Deal that got us out of the Depression, it was WWII. so I'll put you down for a no on that. You act as though this is a shocking idea.."

OK, but Obama did a similar thing to what FDR did in the beginning. FDR was irrationally fixated on holding up prices and wages, to the point of prosecution. So much of Obama's "job spending" was focused on pleasing his union constituency--propping up wages artificially with Davis-Bacon, which tangled up all of the stimulus job programs, especially the "weatherization" program, which needed a lot of low-skilled workers and which got completely bogged down by county-by-county Davis-Bacon red tape and which spewed out money to connected "community groups" that wasted much of the money and got very few actual houses weatherized. Larry Summers consistently described the middle class as "teachers, cops, and firefighers," which caused too much of the cash to be spread on the short-term prospect of preserving the public union status quo instead of employing the maximum number of people with the money available.

Both the New Deal and the War did economic damage. Noting that some opponents of the former were wrong about the latter doesn't change the reality of the former. Opportunists find home across the full political spectrum. What does that have to do with the price of eggs?

True, if you measure the economic growth not in terms of the living standard but in terms of the amount of labor effort and the weight of things produced."

I don't agree with you here. Yes, war is stimulative if you are the United States in World War II because you didn't get your home turf destroyed and you now have a competitive advantage economically for decades. How about for France and England and Germany and Japan? True, they will be stimulated after the war because they have to replace what they lost, but I don't think that war had an overall stimulative effect for them because so much capital and labor were destroyed, and they faced an immense cost and effort just to get back where they started.

How about we stop using the foggy "stimulate" terminology and focus on the only thing that ultimately matters - the standard of living, driven by production of utility generating goods and services per capita. Real economic growth is improvements in the standard of living, else what's the point? Was the standard of living higher or lower in the U.S. before vs. after the War? I don't see how the answer could be anything other than lower. A ton of energy and resources, not to mention lives went into activities and objects that do not generate lasting utility. Unless you can eat a tank or prefer to live in one. You most certainly can not plow fields with it, not very effectively anyway.

Perhaps you would agree with that but claim that somehow the War put the U.S. on a real economic growth trajectory much steeper than had the same years passed peacefully (and without the Nazis in Europe)? But why would you think that? As you said, Europe and Japan were pretty much wiped out. How helpful are economic partners that have little productive capacity. If they were buying American goods, it was with the Marshal Plan American subsidy money! Bring things to today for an analogy, would we be economically better of with a richer or poorer Mexico? You are focusing on the "competition" aspect of economic activity, but the primary driver of the economy is production and exchange of goods and services (which when crossing borders is called trade), with the competition providing the pressure for improvement. So if anything, less competition, for whatever reasons, means lower growth in productivity.

It is of course hard to conceptualize a totally proper comparisons. As MCN pointed out, you can imagine just no war, you also have to imagine no conditions that lead to it. For example, Germany's economic conditions had a lot to do with the rise of Nazism, but those conditions in turn were exacerbated by economic protectionism that rule the world before the war. So even if we point to some economic positive side-effects of the war, such as reduction of those protectionist barriers, they disappear from the delta under the "no war and no conditions that led to it" analysis.

ZORN REPLY -- All these years folks on the right have been telling us no, no it wasn't the New Deal that got us out of the Depression, it was WWII. so I'll put you down for a no on that. You act as though this is a shocking idea...

MCN RESPONSE: I can see how you might come to your generl conclusion when you cherry pick your sample to an unusual situation like the US in WWII and ignore the more typical set members.

Let's take a more representative sample for that time, period, though. Why don't you think about just how stimulative WWII was to the economies of, say, Germany and the Soviet Union. Or Poland. Or France. Or Italy. Or Japan. Or China. Or Britain.

That wouldn't help much, though, given that good portions of those countries were flattened.

See how much fun you can have when you limit yourself to only looking the set members you want to look at, and ignore the rest? That a phenomenon we in the business world call "being wrong".

ZORN REPLY -- There seems to be significant agreement that the sequestration cuts in defense spending will be very hard on the economy-- set aside, for the moment, any concern about national security and whether it will truly be compromised. Is this true or false? Is military spending stimulative and will choking it down cause unemployment to rise and hurt the overall economy. If yes, then marching off to war, which ramps up military spending, seems like it would be quite stimulative, win or lose. If no, then everyone's who's fretting about the effect of the upcoming cuts is wrong.
My understanding of stimulus, and correct me if I'm wrong, is that it moves money around at a time when for one reason or another money is not otherwise moving around at a rate to get the economy humming. Government as spender of last resort, in other words. It's not optimal .. a truly robust economy is self stimulating ... but sometimes necessary.
My understanding of the broken windows paradox, same admonition, is that the money presumptively spent fixing scores of deliberately broken windows may SEEM to stimulate the economy (jobs for glaziers, opportunities for glass pane retailers) but that it may (or does) simply redirect money that would be spent on other things; things that may actually have long term value as opposed to simply being necessary replacements. But if that money is NOT being spent on other things for one reason or another -- lack of confidence, lack of capital, whatever -- it may, in fact, be a legitimate way to get things going again by breaking a few score windows.
Tax cuts are said to be stimulative .. you put more money in people's pockets and they spend it. Makes sense. But cutting taxes may cause the government to fire people who then have far less money to spend (defense workers, for example). it seems to me to be both an empirical and philosophical question how and in what circumstances government should prime the pump and/or practice austerity...that there is no one obviously right, historically vindicated answer that fits all circumstances.
Which is why economists don't all sing off the same page the way, say, physicists and mathematicians and others in fields that often yield "right" answers tend to .
Your turn now.

If I may add to whatever MCN will say, in addition to what I said to Greg J about WW2 right above.

Money and wealth are not the same thing. Wealth is inventory of utility generating consumables and, more importantly, the capacity to produce more of useful, living standard maintaining and improving stuff, which is summed up in a word "capital". Moving money around - to be more precise, circulating more money, does generate economic activity, because it misleads people into thinking more resources are available. Where, how and how much activity is generated depends on a particular way it is done. So if the economy measured in terms of activity, as it came to be the standard nowadays, stimuli, wars or defense spending are great. But to me, the real question is do they add or subtract to the capital, relative to what it would be otherwise. And the answer is to various degrees they subtract. It is very clear why it is so with wars, fairly clear with defense spending and a little bit harder to understand, but still true with stimuli (because almost by definition they shift resources from more likely to succeed to less likely to succeed projects).

Separate from the economic question is the social question. (And of course social stability, just as national security are prerequisites of a healthy economy.) A drastic cut in defense spending will mean a lot of new unemployed and that shouldn't be taken lightly, particularly since there will be concentrations of them in particular locations. So if there are deep defense cuts, there does need to be a plan to help with that transition.

Do note a contradiction: if WW2 pulled the U.S. out of the Great Depression, why didn't the demobilization, the drastic cut in defense and overall government spending that followed didn't put the U.S. right back into a recession?

ZORN REPLY -- I'm sure finer minds than mine can explain the US economy of the 40s and 50s. But in essence what you're saying is that activity that generates "wealth" is better than simple money passing from hand to hand. So if the government spends $1000 on building or repaving a road, that's a better use of the money than if it gave person X the $1,000 and he spent it on 10 bogus homeopathic treatments?

@EZ: Good, thoughtful response. However, it does not address my central point: warfare is an inherently destructive enterprise that destroys lives and property.

In other words, on a consolidated world-wide basis, WWII was a net loser in terms of economic capacity and consumer value, even though there might have been the occasional winner, e.g. the US. This true of any war I can think of. If you disagree, give some thought to the fate of the city of Carthage.

Along that same line, defense spending is a trade off of security for wealth. We'd rather not have a police force, but we got to. So building another two or three carrier task forces (which a right-winger like me thinks we need) may or may not bring us to the level of national security we require, but it most assuredly takes a lot of medical care and factories and cars and services and what not out of the economy.

In other words, in the short-run at least, defense spending creates jobs, but in the long run, it must be paid for, which takes future resources of the the economy and, even in the short run, doesn't create any consumer goods.

I said in an earlier post that, if you believe what you say, why don't we blow up and rebuild half the east coast? I think that would be a bad idea, but it's your few dozen broken windows writ large.

So why do I think we might need a few more carriers and a net increase another six or seven aircraft: Because I think we are headed for a serious conflict with China and the insurance cost paid now for increasing the armed forces and the deterrent value received thereby is better than paying the cost in ten or fifteen years of losing a war against those people.

ZORN REPLY -- I hope you're wrong about China, but in fact, doesn't it turn out that natural disasters are quite stimulative to local economies? Insurance and federal relief distort the picture, of course, but, as I understand it, some of these hurricanes end up significantly boosting the fortunes of sagging towns.
I have no idea how to calculate the net net on war, esp. one that takes place overseas and doesn't destroy OUR land. And it sounds worse than cold not to figure in the value of human capital lost in war.
Isn't it also the case that economies are somewhat agnostic about what moves money around so long as it's moving? That it would be better for the local economy if you paid a guy $100 to dig a hole and fill it in than $100 to order sets of sheets made in India?

@MCN
I wonder how that was measured, given that the consumer economy was capped during the war. But if you mean relative to the economic output in which tanks and rifles counted, than no doubt. But as you may guess, I don't count that, because you can't eat tanks.

@EZ: I guess you can say that a natural disaster might stimulate a local economy, in the sense that Hamburg was ultimately better off after it was firebombed than before. That doesn't do much for me, though.

However, that argument has two problems: 1) a lot of useful property was destroyed (and lives lost) after the fire (or flood) and 2) the insurance company reserves that were liquidated or the federal assistance that was spent could have been used in other capacities. So you are back to the broken window problem.

I raised this issue on an exam question in my Problems in US Economic History class when I was a junior, arguing that Germany and Japan were better off after the bombing that before because they built a bunch of new, more efficient stuff. When he gave me a B- on that particular question, he countered that, if that were true, Detroit would just blow up its own stuff on rebuild. But that doesn't happen because the old equipment still has value, and equipment should generally be replaced only when its productive value becomes negative.

I don't think your hole digging example is very good. We gave a $100 to a guy who created nothing. That $100 was taken from other people who could have spent it for something that really had value, or at least invested. Or, at least we got $100 worth of sheets, rather than nothing.

This is a difficult problem for people to understand. It seems self-evident that spending money in and of itself creates value. It doesn't. It's got to be spent on things that actually have value, ie something for which people will give up their own assets (money) to possess. No one will pay money to buy a hole that has been dug and filled up.

That's why the Eastern bloc countries went BK, they created things that no one wanted.

I have no doubt that the world was worse economically worse off after WWII than before. As with WWI. Etc.

The same source says It was measured, just as recessions are measured today, in GDP and unemployment. It also seems to be pretty clear that GDP includes the output generated by government spending, which in the war time were tanks, etc., not of much value to consumers. And the unemployment part.. well, not a surprise when you demobilize an army.

So if anything it points once again at the lunacy of the "any activity where $ are exchanged" measures.

Still its rather interesting that even in those misleading terms that recession lasted 8 months. So when did the WW2 pulled the U.S. out of the Great Depression? During the War? Surely not, not in a sense of people being on average better off than before the war. Consumers at home on rations and soldiers in trenches is hardly an improvement in the standard of living. Right after the War? But wait, the economists measuring activity claim that was a Recession! But then again, amazingly mild one, not a deep reversal of the alleged economic benefits of the war. Nothing really adds up...until you start counting all the war time spending on tanks and such in the GDP and claim that the resulting GDP delta constitutes "pulling out". Then I am on board. By such insane accounting WW2 was indeed a great boon to the economy.

Conceptually, it's not necessarily all that hard, but when it comes to devising measurements of what is relevant ... But then again, the idea of the government producing economic measurements implies the acceptance of centralized/external management of the economy.

BTW, not only did the Eastern Block produced a lot of stuff that nobody wanted, but their production was reported to grow by leaps and bounds every year. I remember there was a 5 year plan to increase the quantity of things produced, followed by a 5 year plan to improve the quality of the crap that was produced, just don't recall a 5 year plan to improve the usefulness of things produced (which meant everything was stamped with a quality stamp, resembling the old Chrysler emblem). Perhaps even the Soviets realized the impossibility of the Central Production Committee knowing what people might find useful in their lives.

Eric Re: "ZORN REPLY -- I'm sure finer minds than mine can explain the US economy of the 40s and 50s. But in essence what you're saying is that activity that generates "wealth" is better than simple money passing from hand to hand. So if the government spends $1000 on building or repaving a road, that's a better use of the money than if it gave person X the $1,000 and he spent it on 10 bogus homeopathic treatments?"

But aren't you at least a bit curious to try to think it through and apply the smell test? After all, this is not about nuclear particles, it's about people's behavior.

I count as productive activities that generate utility for people (what MCN referred to as "value", after which people are in some way better off, which is partially subjective partially objective) or create or maintain capital (machinery of production) to generate such utility in the future. The accumulated (not yet consumed/amortized) product of both is what constitutes the wealth of the nation.

Now to your government vs. private spending example. There are some fundamental problems with the example, the main one being that it is just an instance from a distribution:

1. You can be absolutely sure that there are instances of specific government spending that produce more aggregate utility for people that some instances the same amount of spending done by private individuals or businesses.

With the same certainty I can say that out of all the multitudes of sentences you ever wrote there are instances of sentences that are worse then some sentences using the same words written by an overall much less competent writer. But would that be the basis for giving your columnist job to that writer?

You can obviously apply the same logic to anything. Sports would be a good one. Quarterback's with the lowest stats in the NFL still have some games that are better that some games played by the quarterbacks with the best life-time stats.

The choice of who is better - in the economic example private parties comprising the market or the government at creating utility for people - is made on comparing their longer-term batting averages, not individual selected quarters/innings/at-bats.

That the main point. A couple other points.

2. Roads is always a bad example. For a number of reasons (there was a debate between Jerry B and me about the reasons) they fall pretty squarely into the economic "public good" domain (it is not an arbitrary concept, so you are not free to label anything you like "public good"). A very legitimate question with roads, as well as with any public good is how much is enough. Clearly a bridge to nowhere is public, but no good. The sensible solution for such things is the use of user fees whenever possible (gasoline tax is a good approximation for roads) and local spending control whenever possible. That puts the checks in place. Local taxpayers, both benefiting and paying for the roads, are less likely to approve undertaking of wasteful projects. Such accountability is removed when the Federal government sends what seems like someone else's money to various localities.

3) Measurement of utility to a person is hardly an objective thing. How do you measure Happiness? One of the beauties of liberty and free market economies is that you don't need to. People pursue their happiness and are assumed to be adults able to guide their own lives. Pretending for a second that Happiness (or utility) could be measured on a cardinal scale, how do you know that X who spent $1,000 on 10 homeopathic treatments hasn't improved his health and happiness (a placebo effect) by 1,000 units, vs only 800 units that road repair generated? O X might have even spread his extra happiness around to other people to (a multiplier effect :-) ). And in this happy state he might have had inspiration for a cure for cancer. Likely? No. Probable? No. Possible? Yes. Particularly when there are millions of Xs.

The point is, no central authority lives in peoples heads and bodies to know and measure utility/happiness (or to know their ideas of how to satisfy the desires of others). That's why we recognize the Pursuit of Happiness as a Natural right, leave it to people and protect it.

3. In hindsight at least some approximations of some utility can be measured. Health and longevity. Absence of hunger. Amount and quality of shelter. That's how one comes up with standard of living metrics. Not that we know them to be true measures. We just believe them to be positively correlated with utility/happiness. But as hard as it is to measure utility in hindsight, estimating how much utility will be produced from any proposed activity is close to impossible.

On a number of occasions I posted a very basic truth that the majority of business investments fail, but the $ weighted average across all of them tends to be positive and that's what moves our standard of living forward. But there is no way of knowing which will succeed and which will fail (at best in some narrow cases probabilities can be assigned). If your example said "in 1970 something gave person X the $1,000 and he spent on building a device that would revolutionize information and communications between people", compared to road repairs it would sound almost as hopeless as 10 homeo treatment, yet one of those X's created the Apple computer.

So it is even possible for the private sector to have a lower percentage pass completion rates than the government's. But it still comes out ahead by scoring a lot more points.

Anyway, I hope at least a few of my sentences, maybe even a paragraph or two were reasonably readable and comprehensible, maybe even made sense.

What are your thoughts on possible positive psychological byproducts of a "good" war? For example, if a big negative experience such as the 1929 Crash makes everyone on average more risk averse, in some sense perhaps too risk averse (at least according to Keynesian "animal spirits" view :-) ), can a "good war" victory and a few million people returning from a very risky business of war reset it back to a higher, more economic growth generating levels? Of course it would have to be a huge shift to result in a net positive, because the available resources to take risks with would be much more scares, consumed by the war. More likely it can be just an small ameliorating effect of what is otherwise a big negative. But still I am curious if you know of any research or in depth thinking on this topic.

to add, Eric, since I missed your "Isn't it also the case that economies are somewhat agnostic about what moves money around so long as it's moving? That it would be better for the local economy if you paid a guy $100 to dig a hole and fill it in than $100 to order sets of sheets made in India?" before:

1. Whomever uses the sheets obviously is getting an extra utility

2. What do you think happens with $100? It could I suppose under someone's mattress. But more likely it returns here, either because U.S. products are bought, but even more likely, U.S. securities are bought, sometimes stocks and bonds, often government bonds. So either invested back in the U.S., or financing U.S. government. How do you suppose the U.S. government is able to run such deficits for so long? The Chinese hold something like 20% of the U.S. debt if I recall correctly. How did they get the dollars to buy the bonds? Aside from foreign aid, there is but one way for foreigners to get dollars - sell something to Americans.

In contrast paying someone to dig a hole added no net utility - the hole is useless and as MCN pointed out already, merely moved resources from one pocket to another. The latter, per my post above, is on average a net negative proposition as far as economic efficiency.

So, no, economies are not agnostic to moving around of resources by government edict. If that were true, then the economy would be agnostic to say forcible switching of jobs. You take mine, I take yours. Do you think we will not be worse off for that?

ZORN REPLY -- Well, it would depend on the skill set and obviously there are greater and other considerations than just economic effectiveness (as well as many definitions of just what that would mean). It might be that you could have a higher GDP with more government meddling -- China's generally outpaces ours, am I right about that? -- and forcible job switching. But that's like saying we'd all be safer if the government implanted tracking chips in everyone's chest to prevent all kinds of criminal and social offenses.

Eric,
I might have completely misunderstood your question. By " if it gave person X " did you really mean "didn't tax or in some other way transferred from person X"? That's how understood the question - public vs truly private use of the same resource. If however you were just pitting two different public expenditure modes, I apologise for taking up cyberspace with a lengthy answer,... I don't have a good answer to that except for what I said about accountability and local/distributed control being a desirable feature of public good expenditures. A community is too poor to collect enough taxes and fees to maintain the roads? Help the needy individuals there with income support (expansion of Unearned Income Tax Credit to replace all welfare), don't give the money to the local government earmarking it for roads.

Eric, re: "ZORN REPLY -- Well, it would depend on the skill set and obviously there are greater and other considerations than just economic effectiveness"

I used an example where I was rather obvious that it wouldn't be an economically beneficial change. But if you look back at my one post back, the longer one to which I added later, the point is that on average the resource allocations made by the free market price mechanism, when not distorted by currency manipulation (money printing and such), produces a great deal more economic efficiency. The other points there was that batting averages, not instances is what is relevant because there is no way to know in advance an economic success of any undertaking. Public Good - considerations other than economic efficiency should be addresses in their own right, which I also mentioned.

Regarding China's GDP. First of all what you meant by "outpaces" is the growth rate. But China's GDP per capita is 1/6th of the U.S. and obviously started even lower. When you are in the early part of the industrialization curve the growth rate is faster. Perhaps more importantly, what I said earlier is the GDP is a poor measure of the living standard when it includes government spending, even worse, when a lot of it is government defense spending. (Plus China manipulates its currency, and controls information, making any numbers even more suspicious.) And it is the growth in the living standard that matters to people, not the amount of sweat and labor in the economy. Back to what was said here about USSR. That almost 100% government controlled economy was reporting tremendous GDP growth.

I did not understand "But that's like saying we'd all be safer if the government implanted tracking chips in everyone's chest to prevent all kinds of criminal and social offenses." Perhaps because I am short on sleep. Please expand on it if you have a minute. If you are trying to say there is some optimal mix of government economic intervention with a free market (outside of true Public Goods), I don't know why that analogy is appropriate. Again,on average, a government made resource allocation choice is worse and you don't know in advance. As opposed to say an analogy of mixing your breakfast cerial with ricin - there is no mix that makes you better off (in the case of ricin, no mix that leaves you alive.) But maybe that's not what you meant.

Boris, I don't know of any research on that topic, specifically. There are a lot of negative psychological effects that would be difficult to overcome e.g. the emotional damage to servicemen who experienced the horrors of combat or physical wounds as well as that suffered by the families who lost loved ones or who are dealing with the effects of their relatives' physical and psychological wounds. Anything else I could say on the topic would be entirely speculative, but I'm guessing that these negative effects would outweigh any "U-S-A U-S-A" impacts.

Your points above are well taken, especially the ones about China's relatively faster growth. I don't have to tell you that rapid gains are much easier in an underutilized, underdeveloped country than they are in a mature, industrialized one.

About "Change of Subject."

"Change of Subject" by Chicago Tribune op-ed columnist Eric Zorn contains observations, reports, tips, referrals and tirades, though not necessarily in that order. Links will tend to expire, so seize the day. For an archive of Zorn's latest Tribune columns click here. An explanation of the title of this blog is here. If you have other questions, suggestions or comments, send e-mail to ericzorn at gmail.com.
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Contributing editor Jessica Reynolds is a 2012 graduate of Loyola University Chicago and is the coordinator of the Tribune's editorial board. She can be reached at jreynolds at tribune.com.